Politics and Foreign Currency Trading

Politics and foreign currency trading are often closely interwoven. When countries spend too much money it is often to buy votes to keep the governing party in power. When countries need to adopt austerity measures, the governing party often loses control because voters become disillusioned and angry. Someone once said that politics is the art of the possible. This is a useful thought to keep in mind for those seeking to make money from fluctuations in foreign currency rates. Bearing in mind the connection between politics and foreign currency trading, nations take two different routes in seeking to adjust the value of their currencies, on the Forex markets. One route is to simply buy or sell other currencies with their own. This can be done more or less behind the scenes. The other is to directly devalue a currency. This latter route causes people (voters) to wake up in the morning and discover that they bank deposits are now worth a tenth of what they were the night before. Such strong medicine is often needed and has often been used to correct currency imbalances and put nations on the road to economic recovery. Having a sense of how politics and foreign currency trading relate to each other can be profitable if a trader understands what a nation may or may not do with its monetary policy.

Keeping the Value of a Currency Low

Over the years Japan, followed by Taiwan and mainland China, has written the book on managing their currency. Japan has an export driven economy. It is poor in natural resources but has a well-educated and industrious work force. Japanese companies such as Toyota and Sony are world leaders in their fields. Thus Japan sells a lot of products to the rest of the world. Its major customers are North America and Europe, the largest and most prosperous economies. As money flows into Japan from across the world the value of Yen rises. If it rises too much this makes Japanese products less competitive in foreign markets. Therefore Japan buys foreign currencies, primarily dollars and Euros. They hold these foreign currencies as currency reserves and the purchase of dollars and Euros artificially drives up the price of the North American and European currencies and drives the Yen down. A less pricey Yen keeps Japanese products flowing and keeps employment high in Japan. Here the connection between politics and foreign currency trading is direct; keep the Yen low and the ruling political party stays in power. For those trading the Yen versus other currencies the relationship of politics and foreign currency trading is one of anticipating changes in Japanese monetary policy in response to political realities back in Japan. Considering that the Yen has typically risen against the dollar over the years, Forex trend trading of the Yen versus the dollar has often been a successful Forex strategy.

Regaining Value of a Currency

An all too common occurrence is that nations spend too much and go into debt. There comes a point when they are unable to finance the interest payments on their debt. When investors understand this they demand higher interest rates in order to continue to loan money. This makes the financing problem worse. An all too common solution to this dilemma is for the nation to address the problem via foreign currency exchange rates. The nation decides to devalue its currency. If it takes the overnight route it risks riots in the streets. Therefore a more common solution is to let the currency markets take their toll and drive the value of the currency down at a steady rate. This can reach the same goal but without the ruling party seeming to be at fault. Having a  sense of how politics and foreign currency trading relate in such a case gives the trader an advantage in predicting the value of the currency in question in the momonths to come.